Splitting Payments Between Income and Principal
Asset-backed securities are investments backed by pools of financial assets. These may include real estate mortgages, auto loans, or credit card receivables.
Each payment the trust receives contains a mix of interest and principal repayment. Under Arizona law, the trustee must follow the payer's breakdown.
If a trust receives a payment from interest or other current return and from other proceeds of the collateral financial assets, the trustee shall allocate to income the portion of the payment that the payer identifies as being from interest or other current return and shall allocate the balance of the payment to principal.
A.R.S. § 14-7424(A)This approach keeps things straightforward for both irrevocable trusts and other trust structures. The trustee does not need to calculate what portion is interest versus principal. The payer's allocation controls.
Income beneficiaries receive the interest component for their exclusive benefit.
Liquidating Payments and the Ten Percent Rule
Sometimes a trust receives payments that will eventually liquidate its entire position in a security. If the full liquidation happens in a single accounting period, everything goes to principal.
If the liquidation stretches across multiple periods, Arizona applies a practical default. The trustee allocates ten percent of each payment to income. The remaining ninety percent goes to principal.
If a payment is one of a series of payments that will result in the liquidation of the trust's interest in the security over more than one accounting period, the trustee shall allocate ten per cent of the payment to income and the balance to principal.
A.R.S. § 14-7424(B)The ten percent rule provides a reasonable estimate. Even in a wind-down, the income beneficiary should receive some current return.
At the same time, it preserves most of the payment for principal. The asset is being consumed rather than producing ongoing income.
The trustee should review the trust agreement alongside this statute. If the trust document provides different instructions, those terms may control. Otherwise, this default rule applies.
How payments are split between income and principal affects each beneficiary's tax return. Proper allocation helps avoid disputes and ensures accurate reporting.